Telefonica’s Brazil Stock Sale Means More Room for PurchasesCrayton Harrison and Rodrigo Orihuela
Telefonica SA’s plan to sell shares in its Brazilian unit to finance the bulk of the 7.45 billion-euro ($9.8 billion) acquisition of broadband provider GVT keeps the Spanish carrier’s financing options open for further deals.
By selling new Telefonica Brasil SA stock to fund the 4.66 billion-euro cash portion of the transaction, Telefonica will leave the division’s net debt steady at about 0.3 times earnings, according to data compiled by Bloomberg. At that level, Telefonica Brasil could borrow money to acquire more assets, said Walt Piecyk, an analyst at BTIG LLC in New York.
Vivendi’s agreement last week to enter exclusive talks to sell GVT to Telefonica may accelerate consolidation as Brazil’s four wireless carriers try to cope with slowing growth and the government’s push for greater infrastructure investment. Oi SA, the No. 4 wireless provider, is working with Banco BTG Pactual SA to get Telefonica and Carlos Slim’s America Movil SAB to team up on a mostly cash offer for Tim Participacoes SA, which is controlled by Telecom Italia SpA, people familiar with the matter have said.
“The use of stock to fund this deal is a clear indication that Telefonica is keeping its powder dry to participate in any sale of Tim,” Piecyk said.
If Telefonica, America Movil and Oi made a 40 billion-real ($17.8 billion) bid for Tim -- a 31 percent premium to its current market value -- Telefonica’s share of the acquisition would cost 13.3 billion reais, said Paul Marsch, an analyst at Berenberg Bank. Telefonica’s Brazilian unit could borrow about 4.1 billion reais to take its leverage up to 2.3 times earnings, then sell shares for the rest, Marsch said.
“We have the best mobile network in Brazil,” Telefonica Chairman and Chief Executive Officer Cesar Alierta said at a conference yesterday in Santander, Spain. “It is important that governments have awareness of how important digital is. In Brazil, the president has that awareness.”
Oi and Tim representatives declined to comment.
In picking Telefonica for GVT talks, Vivendi spurned a 7 billion-euro rival bid from Telecom Italia -- the debt-laden controlling shareholder of Tim. Telecom Italia said last week that it remains committed to Tim and will continue to invest in the unit.
The Milan-based company is struggling with debt and lost its investment-grade credit ratings last year. Its net debt of about 30 billion euros at the end of June is about 3.6 times earnings before interest, taxes, depreciation and amortization in the previous four quarters, compared with a 2.6 times for Madrid-based Telefonica. Tim’s debt is 0.2 times earnings.
“TI is now more likely to sell Tim Brazil,” Roger Appleyard, a credit analyst at RBC Capital Markets, said in a note last week. “It is more vulnerable now and is essentially a wireless-only player up against three competitors with strengths in both fixed and wireless.”
The remainder of Telefonica’s 7.45 billion-euro transaction to buy GVT will consist of new Telefonica Brasil shares. The parent would also sell new shares itself so it can take part in the Brazilian unit’s stock sale, maintaining its stake.
Telefonica would need to buy 6.5 billion reais in shares to keep its 74 percent holding in the Brazilian unit, according to Berenberg’s Marsch. Financing that part of the transaction could be more difficult, since the Spanish company doesn’t have much room to raise further debt, Marsch said.
To fund the deal without worsening its credit profile significantly, Telefonica could use hybrid bonds, free cash flow and the sale of other assets such as its stake in China Unicom, RBC’s Appleyard said.
Alierta yesterday said Telefonica is exiting its stake in Telecom Italia, a disposal which would end a seven-year partnership. Telefonica already offered Vivendi an option to acquire its Telecom Italia holding as part of its GVT bid.
A Tim deal would require at least nine months for regulatory approval, giving Telefonica time to also accumulate more cash from operations, Appleyard said.
Telefonica slipped 0.1 percent to 12.05 euros at 9:19 a.m. in Madrid, and Telecom Italia rose 0.2 percent to 86.8 cents in Milan. Tim added 1 percent to close at 12.68 reais in Sao Paulo yesterday. Telefonica Brasil fell 2.3 percent to 46.50 reais, and Oi dropped 2.8 percent to 1.41 reais. America Movil gained 0.3 percent to 16.03 pesos in Mexico City.
Standard & Poor’s left its investment-grade rating of Telefonica unchanged after the company made an initial bid for GVT in August, noting that no debt was involved in that proposal. S&P didn’t respond to an e-mailed request for comment.